The Resource Curse and Political Cycles in Developing Countries: Is There a Connection? the Case of Venezuela2

ALEJANDRO MÁRQUEZ-VELÁZQUEZ1 Freie Universität Berlin, Department of Economics and Institute for Latin American Studies The resource curse and political cycles in developing countries: Is there a connection? The case of Venezuela2 ABSTRACT The main lesson of the resource curse literature is that developing and natural resource-rich countries need to save most of their oil windfalls in foreign currency to avoid it. Moreover, recent contributions to the political cycle literature predict stronger cycles in these countries. This paper investigates how political cycles might explain low oil windfall savings in countries affected by the resource curse. Using the case of Venezuela, this paper argues that the presence of periods of oil-price explosiveness leads to power concentration and increased public investment in prestige projects aimed at increasing the reelection probabilities of the incumbent or his party. To back the argument the article analyzes the Chavista democratic period of 1999–2016. It will also identify parallels to the 1970–1988 period in Venezuela. JEL Codes: D72, E62, O11, Q32. Keywords: oil windfalls, political cycles, resource curse, Venezuela. 1 Address: Institute for Latin American Studies, Rüdesheimer Str. 54/56, 14197 Berlin, Germany. Telephone: + 49 30 838 72644. Fax: +49 30 838 55464. Email: [email protected] 2 Version: 6.1.2 (work in progress, please do not cite nor circulate). 1 2 he 1970s are remembered in the Global North as a crisis prone decade, one in which the dilemmas posed by stagflation dominated the public T debate. However, in the major oil exporting countries within the Global South, the memories of the 1970s are related to bonanza times. Nevertheless, the bonanza was short-lived in Venezuela, one of the major oil exporting countries of the developing world at the time, given that since the mid-1970s the country went through its hardest crisis since the beginning of the 20th century. Some authors refer to this crisis as a depression since it went on for about 30 years until oil prices eventually picked up at the end of the 1990s3, as can be seen in Figure 1. In fact, during the 55 year-period depicted in Figure 1 the correlation between a terms-of-trade corrected real GDP per capita4 and real oil prices was -0.51. Therefore, Venezuela represents a classic example of the resource curse, which relates to the idea of the abundance of oil-resources hurting the long-run growth perspectives of countries. Moreover, Venezuela was, until recently, one of the oldest democracies of Latin America. The country witnessed a democratic transition in 1958 and remained a democracy until the late-2000s, according to the Polity IV dataset5. The database considers the last years of the Chavez administration as an 3 Agnani and Iza (2011). 4 This measure is better for measuring Venezuelan living standards since it takes into consideration the varying international purchasing power of exports, mainly oil (Hausmann and Rodríguez, 2014, p. 19). 5 Marshall, Gurr and Jaggers (2017). Alejandro Márquez-Velázquez 3 autocratic regime. For instance, in 2009 the government decided to close more than 30 TV and radio stations6. Also, during the same year, the government organized and won a constitutional amendment referendum that removed presidential term limits, despite having organized, and lost, a similar referendum in 20077. The Polity IV database then considers Maduro’s administration as a democracy until 2016. At the end of the previous year, the opposition won the parliamentary election for the first time since Chavez was elected president in 19988. However, in 2017, the Tribunal Supremo de Justicia, the highest court in the country, supplanted the parliament because it swore in the three parliamentarians of the Amazonas State, whose election was deemed fraudulent by the Consejo Nacional Electoral, Venezuela’s institution responsible for organizing elections9. Since then Maduro has been ruling without a parliament, and elections of the Amazonas parliamentarians have not been reorganized10. Despite the debate on the recent democratic status of Venezuela, the country has usually been considered as one of the oldest democracies in Latin 6 Castillo (2009). 7 Carroll (2009). 8 BBC Mundo (2015). 9 Huston-Crespo (2017). 10 The court’s decision was criticized by the prosecutor general of Venezuela, Luisa Ortega Díaz, who was thereafter dismissed by the National Constitutional Assembly, established in 2017 with the aim of drafting a new constitution (Bracho, 2017). The constitutionality of this assembly is disputed and it is not recognized by over 40 countries, including Argentina, Brazil, Colombia, the United Kingdom, and the United States (Infobae, 2017). The institutional crisis of 2017 was accompanied by several demonstrations that left about 127 dead (Niño, 2017). 4 America, having a democratic status during most of the period depicted in Figure 1. Therefore, the literature of the political business cycle (PBC) applies to the case of Venezuela. This is a literature stemming from the seminal contribution of Nordhaus11. The author builds a model depicting high inflation, increased output and low unemployment before elections and recessions just thereafter12. The main idea of this line of research is that incumbent governments manipulate the business cycle during electoral periods to try to remain in power. The insights of the PBC literature seem valid for the Venezuelan case, given that between 1960 and 2014 the previously mentioned negative correlation between a terms-of-trade corrected real GDP per capita and real oil prices was lower during electoral years than during nonelectoral years (-0.42 vs. -0.53)13. More recently, Vergne provides evidence in favor of the hypothesis that developing and natural resource rich countries have stronger political cycles than similar countries with less natural resource abundance14. The author finds evidence of government expenditures shifting towards current expenditures during electoral years, which are more visible to the voter, according to the author. Furthermore, Nieto-Parra and Santiso show that, for 11 Nordhaus (1975). 12 For a recent literature review on the PBC refer to Dubois (2016). 13 Own calculations based on data from Feenstra et al. (2015) World Bank (2018a). 14 Vergne (2009, p. 73). Alejandro Márquez-Velázquez 5 the case of Latin America during 1990–2006, the shift towards current expenditures is accompanied by increases in primary fiscal deficits15. Figure 1. Crude oil barrel’s yearly average price and Venezuela’s terms of trade corrected GDP per capita 120 70 60 100 50 80 GDP per capita (right) 40 60 2010 USD 30 40 THOUSAND 2011 USD 20 20 10 USD/Crude oil barrel (left) 0 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Source: data from Feenstra et al. (2015) World Bank (2018b). Oil prices are an average of the Brent, Dubai and West Texas Intermediate prices. Therefore, this paper attempts to answer the question of how such strong political cycles might explain low oil windfall savings in countries affected by the resource curse, such as Venezuela. It argues that oil price dynamics affect the political cycle in developing petrostates in the following way. The presence of periods of oil-price explosiveness allows the government 15 Nieto-Parra and Santiso (2012, p. 560). 6 to increase public investment both during electoral and nonelectoral years. Such investments are mostly decided by the president, who increases her power during these periods. Oil windfalls are thus spent in expensive and prestige investment projects deemed able of increasing the reelection probabilities of the incumbent or his party. To back the argument the article analyzes the Chavista democratic period of 1999–2016. It will also identify parallels to the 1970–1998 period in Venezuela. Both periods are marked by high oil-price explosiveness. The following section presents a brief literature review on the economic effects of the oil industry in developing countries, the PBC and oil-price explosiveness. Afterwards, I analyze the most salient economic policies and outcomes in Venezuela accompanying political cycles and oil-price dynamics during two important periods for the country’s democracy and oil price evolution. The final section concludes. The political economy of petro states, electoral cycles and oil-price explosiveness Developing countries with a petro-state have underdeveloped non-resource tax systems16. This is often explained by the parallel development of a centralized state and the oil industry, such as was the case of Venezuela in the 16 Karl (1997, p. 43) and Crivelli and Gupta (2014). Alejandro Márquez-Velázquez 7 early 20th century17. In other words, in petro-states society depends on the state and not the other way around, as is usually the case18. The source of dependence are the windfalls generated by the oil sector. The resource curse literature considers rent seeking as a transmission mechanism between natural resource abundance and relatively low long-term growth19. Rent seeking being generally understood as activities seeking to “capture property rights from the government”20. Instead of fostering new industrial sectors that would bring forth structural transformation, the petro-state of a developing country focuses its attention on capturing oil rents and thus becomes a prize to be captured by all major actors in society, all of which have vested interests in the further development of the oil industry: international oil firms, political parties, the domestic business elite, unionized labor and the military. Oil money allows the state to easily address claims of these different groups and Venezuela has been a showcase of the appeasement strategy financed by oil money. Appeasement is defined by Trinkunas as a strategy of civil governments for taking control over the military21. It involves adopting policies in favor of and increasing government expenditure towards interest groups with the aim of discouraging their political intervention.

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